The Nil Rate Band Trust

The NRBT can also be used in long term care planning

Although primarily used as a tool in Inheritance Tax planning the Nil Rate Band Trust can also be used in long term care planning.

The Nil-Rate Band (NRB) is a threshold at which the first £325,000 (2017/18) is tax-free and where the excess is taxed at 40%.

Many couples draw up simple Wills whereby on the death of the first partner the whole of the estate passes to the survivor.  Should the surviving partner then need long term care the entire estate is available to be assessed by the Local Authority for the contribution to the payment of long term care costs.

By equalising your estate and drafting Wills that incorporate the Nil Rate Band Trust you and your partner can protect the Nil-Rate Band of the first to die from being assessed by the Local Authority.

Benefits of the Trust

  • Protected £325,000 (2017/18) from being assessed for long term care costs
  • If your estate value is above £2M it may be beneficial to include a Nil Rate Band Trust in your Wills to reduce the estate value of 2nd death to enable your executors to claim the Residential Nil Rate Band in order to reduce the IHT bill on your estate.
  • Whilst you are both still alive your affairs are exactly as they are today; the trust is not established until first death so no assets are transferred to the trust until then so you can both fully benefit from all property, assets and investments in your estate
  • During their lifetime, the surviving partner can continue to benefit from the trust assets and the deceased partner’s estate.

How does it work?

How it works: The Nil Rate Band Trust

 

Case Study

Mr and Mrs Holmes have made no plans for long term care.  They have a joint property worth £530,000 with no mortgage and joint investments worth £120,000.  In their Wills, they have left everything to each other and then their 3 children.  Shortly after Mr Holmes’s death Mrs Holmes needs to enter a care home.  The whole of her £650,000 is assessed by the Local Authority to pay for her care costs.   Her annual fees are £50,000 and she stays in the home for 10 years before her death.  Their children inherit only £150,000.

The Solution

They re-draft their Wills to include the Nil Rate Band Will Trust and also equalise their estate by severing the tenancy on their property to tenants-in-common and by re-distributing their investments so that they are solely held.

The Result

Only Mrs Holmes’s own estate of £325,000 is assessed by the Local Authority.  The £325,000 held in the trust is not assessed and can be passed onto her children on her death.

Important Considerations

The estate must be equalised so that both partners have sufficient assets in their own name.  This often involves changing the tenancy on the main property (and perhaps additional properties) to tenants-in-common.


Here is a PDF with a more detailed explanation of the trust and a case study.